Lord Turnbull: My Lords, in the seven or so years since I joined the Economic Affairs Committee, it has produced a number of excellent reports such as those on education, training and skills for the half of the school leavers who do not go to university, building more homes, the operation of the Bank of England and the subject of today’s debate, Where Have All the Workers Gone? This was produced when I was not a member, but I am happy to praise it highly.
I wondered whether there was a thread connecting these subjects. I found an answer from the excellent testimony we received recently from Dr El-Erian, the president of Queens’ College, Cambridge. The connecting thread, he argued, was the supply side of the economy, which has been neglected over the past decade, including much of the labour market, while too much attention has been paid to managing demand in the economy. He argued that there was a dominant view in the decade 2010 to 2020 that there was a surplus of savings and insufficient demand in the global economy and in the UK, which was seen as constantly teetering on the verge of recession, meaning that interest rates needed to be kept low. It also meant that you could flood the system with fiscal and monetary stimulus and not pay the cost in terms of inflation. Dr El-Erian’s conclusion was that we live no longer in a world of insufficient demand but in a world of insufficiently flexible supply. The supply side is governing the outcomes for growth.
A number of events have damaged supply here in the UK, some coming from outside the country and some from faulty domestic policy decisions. In the decade between 2010 and 2020, the Bank of England and the Government tried to boost demand by stuffing the banks with liquidity through QE, while boosting household incomes by increasing public spending faster than taxes. But this failed to produce growth; it was described as “pushing on a string”.
Looking through the past reports of the EAC, one can see where opportunities to improve the supply side of the economy are being missed. In the area of skills, we have funded universities generously but, as the noble Lord, Lord Willetts, noted, the provision for school leavers not going to universities but taking courses such as HNCs or BTECs, or going to apprenticeships and FE colleges, has been trashed. As a result, we do not have enough skills to build the number of houses we need. Priority has been given to helping first-time buyers but we have not increased the supply of homes for them to buy, with the result that house prices have risen.
The report we are discussing reveals a major anomaly in the British economy, as the noble Lord, Lord Skidelsky, pointed out. During the pandemic the level of inactivity in labour markets around the world rose, but in almost every other major country the level of inactivity has returned close to pre-pandemic levels. The UK stands out as the one where inactivity levels have gone up and remained high. The ONS published revised figures on the labour market earlier this week and, although there are some doubts as to how much confidence we should place in them, they show a picture even worse than we expected when the report was written. The  inactivity rate has been revised upwards and the numbers who are long-term sick have been revised up from 2.4 million to 2.8 million. Something has gone seriously wrong when the numbers who are long-term sick are this high while there are serious labour shortages in key parts of our economy. Because we are failing to get enough of the people already living here into work, we have resorted to bringing in more workers from abroad, with all the tensions that brings.
As the report indicates, the reasons for the inactivity rate rising and staying high are complex: the ageing population, changing preferences about early retirement, access to disability benefits and a deterioration in health, physical and mental, are all contributing. The report rightly urges the Government to study this more intensively. I think paragraphs 58 and 59 of the report rather downplay the role of sickness in raising inactivity. In the light of the new figures, we should possibly revisit that conclusion.
What does all this mean for policy going forward? The emphasis should be on measures that improve the supply side of the economy and productivity, rather than simply pushing more money into the banks or giving short-term, pre-election tax cuts. We should certainly aim to improve health, which is acting as a major drag on our performance.
Other evidence we have heard from the committee recently is that, despite the huge quantity of government debt that needs to be sold each year, there has been no significant difficulty apart from the Truss crisis. This indicates that we may have some time in which we could prioritise measures to improve supply and productivity over further increases in demand: by changes to in-work benefit rules, improvements in healthcare and boosting investment, public and private. That is pretty much the approach recommended by the national institute in its latest report on the economy.
I have one final observation: we should reorganise our thinking and our statistics around the way we characterise age 65 as a watershed. Below that age, people are described as “of working age”, implying that those above that age are not. Many in that age group could be brought back into the workforce with the right incentives and support. That is something we should certainly work on.